Postcards from the Edge - Is the Utility Industry in Big Trouble?

No

Thu, 2013-10-17 11:00

Europe has led the way replacing conventional generation with solar and wind. Environmentalists have rightfully high-fived their success. But now the chickens are coming home to roost and the European utility industry, which is needed to enable renewables to be integrated into the electric grid, is being seriously impacted, possibly fatally. Can all this happen in the US?

I've never seen our electric utility industry face so many challenges. Or at least get so many warnings of the gloom and doom to come. Most of the concern centers around the impacts of renewable energy on grid stability and also the effect on the financial health of the industry. A few references to these issues were listed as part of the readers' poll . The topic drew plenty of good comments, more than usual.

But there's more.

Merwin Brown, co-director of Electric Grid at the California Institute for Energy and Environment and a member of our Grid Optimization expert panel, flagged the article "How to Lose Half a Trillion Euros" in the October, 2013 edition of The Economist.

It's a startling article. Here are a few quotes (emphasis is mine):

"ON JUNE 16th something very peculiar happened in Germany’s electricity market. The wholesale price of electricity fell to minus €100 per megawatt hour (MWh). That is, generating companies were having to pay the managers of the grid to take their electricity."

"The trouble is that power plants using nuclear fuel or brown coal are designed to run full blast and cannot easily reduce production, whereas the extra energy from solar and wind power is free. So the burden of adjustment fell on gas-fired and hard-coal power plants, whose output plummeted to only about 10% of capacity."

"These events were a microcosm of the changes affecting all places where renewable sources of energy are becoming more important—Europe as a whole and Germany in particular. To environmentalists these changes are a story of triumph."

"For established utilities, though, this is a disaster. Their gas plants are being shouldered aside by renewable-energy sources. They are losing money on electricity generation. They worry that the growth of solar and wind power is destabilising the grid, and may lead to blackouts or brownouts. And they point out that you cannot run a normal business, in which customers pay for services according to how much they consume, if prices go negative. In short, they argue, the growth of renewable energy is undermining established utilities and replacing them with something less reliable and much more expensive."

Those are operational impacts. The economic decay of European utilities is even more troubling:

"The decline of Europe’s utilities has certainly been startling. At their peak in 2008, the top 20 energy utilities were worth roughly €1 trillion ($1.3 trillion).Now they are worth less than half that…"

"The rot has gone furthest in Germany, where electricity from renewable sources has grown fastest. The country’s biggest utility, E.ON, has seen its share price fall by three-quarters from the peak and its income from conventional power generation (fossil fuels and nuclear) fall by more than a third since 2010. At the second-largest utility, RWE, recurrent net income has also fallen by a third since 2010. As the company’s chief financial officer laments, “Conventional power generation, quite frankly, as a business unit, is fighting for its economic survival.”

" …Renewables have not just put pressure on margins. They have transformed the established business model for utilities. Michael Liebreich, BNEF’s chief executive, compares them to telephone companies in the 1990s, or newspapers facing social media now: “It is an existential threat, he says."

Renewables a threat to the utility industry's very existence? We're going the way of CosmoGirl Magazine?

So after reading the Economist article several times (I always have to read Economist articles several times to understand them) I get my daily email of Utility Dive and see an article quoting FERC chairman Jon Wellinghoff discussing energy efficiency and renewables.

The October 16 Dive article states (emphasis mine:

"Wellinghoff stated that 'utilities need to work with [intelligent efficiency] companies' because ultimately,if we don't do that, we're going to have to have massive changes in our system. Wellinghoff paused for justa moment, seeming to savorhis lastwords. 'Ultimately, utilities are going to have to adapt or die.'

"The audience chuckled.”

Well I'm not chuckling. But I don't think we need to panic either. These are all postcards from the edge telling us that something ominous could happen to our industry if we don't prepare correctly for the future.

The economics are another matter. Will the utility financial structure have to change to avoid the same value crash as happened to European utilities?

Dr. Matthew Cordaro, Trustee at Long Island Power Authority, and former Utility CEO and University Dean and member of our expert panel, (and one of the smartest guys I know) sees it this way:

"Challenges over the next 10 years or so should not measurably change how utilities plan for and recover costs, charge rates or make capital investments. This is not to say that considerable effort in exploring new ways of coping with a changing business environment should not continue, but be aware that the sky is not falling just yet."